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I often hear from new clients that they are watching the market and will call me when they want to trade. “That’s great” I say”, “where are you watching the rates?” The usual answer is a combination of the television and internet and certainly these give a guide to the general market trends but the real market movements are really not picked up in these media. In order to test how good the available data is, I took a day off from trading and tried to follow the currency market from home, It became very clear that there are a few places out there in WWW land where it is possible to see either delayed or live exchange rates, although it is sometimes hard to work out which is which. However, in order to take advantage of the best exchange rates, it is imperative to understand the reasons for the exchange rate movements. The information that is available tends to be mostly news style factual reporting and the more your search the more repetitive the information becomes. Same old same old
What really counts is market sentiment; an amorphous barely definable factor that changes the minds of traders about whether they should buy or sell currencies and, what’s most alarming is that market sentiment can change direction quicker than a spooked rabbit. It is essential to remember that the Foreign Exchange market is driven by speculative flows where hedge funds, banks and institutional investors are searching the globe for a better interest rate yield or stronger growth and preferably both. Economic data and Political comment will determine where they expect that income to come from and that will determine the currency required to secure the chosen investment. As an example, if the bond markets are providing a great return in America, overseas investors will have to buy US Dollars in order to buy those bonds. Hence, the US Dollar will strengthen. But the key, as far as these investors are concerned, is in getting your funds there ‘first’ because, once the markets know about the advantage, everyone moves their funds there, moving the exchange rate and diminishing the currency advantage in the investment. Being the first really means anticipating the data and this is where the adage that traders ‘Buy the rumour and sell the fact’ comes into play. Rumours within the market of a change in interest rates or weak or strong economic data will almost never be reported in the press or on the internet. However, these rumours are exactly what international investors will use to decide where to move their funds around the globe. The result is that by the time the press has the news, the market has already moved and the announcement of the actual data or interest rate decision will often produce the opposite effect to the expected one. This is because those who would trade on this news have already done so in anticipation of the announcement and once they have seen the result of their trade, they take profit, reversing their original transaction. On the contrary
At the time of writing, the Bank of England is meeting to determine UK interest rates. The expectation was that, with so much negative economic news from the UK, the monetary policy Committee’s 9 members would vote unanimously for a cut of 0.25% in the UK base rate to stimulate consumer consumption – the driving force of the economy. However, retail sales haven’t shrunk as many expected they would after the 7th July bombings. In fact retail activity is still relatively buoyant and certainly compares well with Europe and the US. Consequently, even though inflation is topping the BOE’s target rate to 2.0%, they may well stay their hand until they have another month’s worth of post 7th July data before acting. This rumour has allowed the Pound to rally, pushing the US Dollar above $1.7800 briefly. Should the BOE leave interest rates alone on 4th August, Sterling might just rally harder and more convincingly. However, because traders are waiting for what they perceive to be good news, anything negative will create an instant sterling fall of a cent or so as profits are taken and pounds are sold. Knowing the
facts may save some from the general rigours of the forex market but knowing
the speculation, will protect and save you from the worst that the market
has to hurl at you. The use of a specialist currency Dealer will ensure
you have an ally in the market who will make sure you know as much as he/she
does; saving you time, money and hassle.
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